How to welcome outside directors

Often the CEO is the founder, principal shareholder, and chairman of a private company board. In many cases, all directors are members or friends of the founding family. Permitting outsiders into the boardroom can be daunting and may even seem counter to company culture.

So why would the CEO of a private company welcome independent directors? Recent research from the NACD highlights the importance of diverse perspectives in the boardroom, particularly in private companies. “Twenty-seven percent of private companies highlighted the lack of diverse perspectives as a significant barrier to sustaining an effective board culture.” And if the CEO’s ultimate goal is a liquidity event – an IPO, merger or sale – adding independent directors may be necessary to the process.

Understanding both the concerns and the value is essential before beginning the search for outside directors. If the transition is poorly executed, fears may quickly prove justified. Some newly appointed independent directors may find their roles unclear and their positions awkward. But if done right, adding independent directors can strengthen relationships between the existing board members, adding real value for stakeholders.

Independent board member and business advisor Trip Tripathy has experienced both sides, holding top management roles in global retail and consumer product companies before becoming a director. “As CEO, relationships with independent directors are key. They can provide powerful perspective that insiders don’t have,” he states. “Some risk areas require external expertise, but in other cases what’s needed is the voice of the customer, or the stakeholder viewpoint. Involving the CEO in the conversation and selection process is critical, as these relationships may seem threatening.”

The value of an outside perspective

As we shared in our recent column “No outside directors? You may be missing out,” more than half of private company directors are independent, and there are plenty of good reasons why.

Independent directors contribute to effectiveness, transparency, and diversity of thought. For early-stage startups, independent board members play a key role in preparing for a public offering; for those anticipating a generational transition, outsider perspectives can add tremendous value. But private companies who aren’t in transition mode could also benefit by diversifying their boardrooms. Because they have no conflicting interests, independent directors’ presence can improve decision making, enhance governance, and increase stakeholder confidence. They can fill gaps in knowledge, helping your board deal with risks, opportunities, and challenges.

Help your CEO embrace the value

Board members pursuing sustainability play a vital role in acclimating the CEO to this important idea. Your CEO is a successful leader; successful leaders listen to people they trust to help them achieve their goals. A trusted advisor on the board – often the company’s banker, attorney or accountant – can influence this smart leader to welcome outside directors.

Consider these steps to move your CEO to “yes,” with a smooth transition.

1. Identify the WIFM for the CEO. In any effort to influence, the first step is to understand your audience’s concerns, and identify gaps your solution may fill. What’s in it for them? Listen for issues the CEO raises in meetings, and how they react to agenda items that are future-focused. Among the many challenges that face the company, which risks worry them most– financial performance, cybersecurity, competition? What opportunities excite them – adding new products, expanding to new markets? Where might additional perspectives or skills add value?
2. Link your solution to the CEO’s priorities. Clearly communicate the benefits of adding independent directors, including enhancing strategic decision-making, and increasing shareholder confidence. Emphasize that the selection of the right independent voices will be based on the issues the board is facing, highlighting the ones the CEO is most concerned about. Be transparent about the reasons behind the decision, such as improving corporate governance, and bringing diverse expertise to the board.
3. Manage their concerns and expectations. Anticipate and address any concerns or reservations the CEO may have about adding independent directors. Common concerns include a perceived loss of control or potential conflicts. Emphasize that the role of independent directors is to support and add value, not to micromanage or undermine the CEO’s authority. Clarify that their presence is intended to enhance board effectiveness and contribute to the company’s long-term success. Real-life examples can help illustrate positive outcomes that can result. Consider taking the CEO to lunch with a CEO friend who has seen how well this works.
4. Be transparent and collaborative. “A smart chair will solicit input from the CEO,” says Tripathy. “Engaging them in the process makes them more willing.” This can include asking for their input on the desired skill sets and qualifications. Setting compensation for directors is a place where transparency and collaboration are particularly important. Natalie Smyth, a principal at ClearBridge Compensation Group, suggests linking the compensation discussion to business strategy. “A big piece of the value proposition is industry or specialized expertise,” she says. “And if you’re planning to go public, properly compensating for the independent advisor’s perspective demonstrates credibility and good governance.”
5. Use relationship juice. Encourage relationship-building activities between the CEO and potential independent directors. This could include informal meetings, networking events, or collaborative projects that allow them to get to know each other on a personal and professional level. Consider the board’s culture and the CEO’s comfort level – will they bond better at lunch at the yacht club or volunteering at a food drive?
6. Onboarding properly is essential. Engage the CEO to create a plan for onboarding that serves the needs of the management, the new director, and the rest of the board. A good approach is to assign a board buddy, responsible for introductions to other members, important documents, and board culture. Who will connect the new director to other members of management? They’ll need time and attention from the management team to understand the business, so they can properly contribute and succeed.

Whether your CEO is already open to this idea or you are presenting it for the first time, it’s important to be sensitive to their issues. External advisors or consultants who have helped others can be valuable at this pivotal moment. Approaching the introduction of independent directors in a collaborative and transparent manner, highlighting the positive impact on the company’s strategic direction and governance, can help the CEO see the value in this important governance practice.

Glenn Davis is a principal emeritus with Kaufman Rossin and a director in the firm’s risk advisory services department. He has served on both public and private company boards and specializes in providing compliance and consulting services to companies and their directors. He can be reached at gdavis@kaufmanrossin.com

Janet Kyle Altman is a principal and Chief Marketing Officer for Kaufman Rossin. She is past chair for several non-profit boards and certified by Wharton Executive Education in Building Exceptional Boards. She can be reached at jaltman@kaufmanrossin.com.

Read the full article on Private Company Director.